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Study finds personal bankruptcy is out of reach for many in need

Successfully managing one's finances can be one of the most difficult parts of adulthood. Even people who make smart financial decisions, plan ahead and accumulate savings can experience financial challenges when unexpected hardships strike, such as job loss, medical issues or other unforeseen disasters. Although bankruptcy law does provide a way for people struggling under severe debt burdens to get a fresh financial start, filing for bankruptcy can be more difficult than many people realize, and even completely out of reach for some.

In 2005, Congress made changes to the bankruptcy law that significantly increased the costs of filing for Chapter 7 bankruptcy, the form of bankruptcy that cancels a person's remaining debt after assets are sold and used to pay whatever debts possible. A study by a professor at the University of Maine Law School reported that, on average, the costs of filing for Chapter 7 after the 2005 law change increased by nearly $2,000-going from $600 to $2,500-as a result of additional paperwork, mandatory credit counseling classes and higher attorney's fees. Now, a recent study from the Federal Reserve Bank of New York has shown that the 2005 change to bankruptcy law-and the resulting increase in filing costs-has created a situation where the individuals who are most in need of bankruptcy are no longer able to take advantage of this powerful debt relief remedy.

Chapter 7 is an extremely important debt relief option for many people who, due to financial challenges, have no feasible way to repay their debts. Continuing to struggle under the debt burden without effective relief only continues to create further hardship, keeps the debtors out of the economy, and prevents them from getting ahead. Chapter 7 bankruptcy requires a debtor to liquidate or relinquish certain property in an effort to repay whatever debt possible, with the remaining debt being cancelled after the liquidation. For this reason, Chapter 7 is ideal for people who do not have sufficient income or other resources to repay debt according to a payment plan.

Although Chapter 7 bankruptcy hinges on the relinquishing of personal property, it does not require that a filer give up all property for the purpose of repaying debt. A person's property will be divided into two different classifications-exempt and nonexempt-with only nonexempt property being used to satisfy debt obligations. Among the property that many filers are able to keep are clothing, certain jewelry, motor vehicles, household goods, public benefits, tools of a person's trade and a portion of home equity.

Source: Wall Street Journal, "Too Poor to File (for Bankruptcy)," Katy Stech, April 14, 2015

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